Question

Consider the following information for three stocks, A, B, and C. The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the correlations are all between 0 and 1. Expected Standard Stock Return Deviation Beta A 10% 20% 1.0, B 10% 10% 1.0, C 12% 12% 1.4
Portfolio AB has half of its funds invested in Stock A and half in Stock B. Portfolio ABC has one third of its funds invested in each of the three stocks. Which of the following statements is CORRECT?
a) Portfolio ABC's expected return is 10.66667%.
b) Portfolio AB has a standard deviation of 20%.
c) Portfolio ABC has a standard deviation of 20%.
d) Portfolio AB's required return is greater than the required return on Stock A.
e) Portfolio AB's coefficient of variation is greater than 2.0.

Answer 1

Answer:

a) Portfolio ABC's expected return is 10.66667%

Explanation:

The expected return is based on the risk factor of a project. If a project has higher risk its rate of return will be higher. Portfolio ABC has one third of its funds invested in each stock. The return of on A and B are 20% and 10%. Their beta is 1.0 for both the stocks while stock C has beta 1.4. The portfolio expected return will be 10.66667%.